Putting Advanced Metering Infrastructure to the Test

by Lisa Wood, Institute for Electric Efficiency

Across the nation, electric utilities are installing smart meters. A recent Institute for Electric Efficiency (IEE) survey found that as of September, 27 million two-way communicating digital electric meters—representing more than one in five U.S. households—have been installed. And based on utility projections, the survey estimates that some 65 million smart meters—more than half of all U.S. households—will be installed by 2015.

Smart meters, as part of an advanced metering infrastructure (AMI) system, enables utilities to measure electricity use in real or near-real time. AMI also creates a two-way communications link between utilities and their customers. This provides benefits for both, including:

  • Detailed consumption information and rate programs that can encourage the efficient use of electricity and reduce peak-demand periods,
  • Faster outage detection and management, along with remote and on-demand service connections,
  • Off-peak charging rates for plug-in electric vehicles (EVs) when the cost to generate electricity is low, and
  • Smoother integration of distributed generation resources.

But how do the benefits of AMI and associated home energy management technologies for customers compare with their costs? To get a better idea, IEE recently commissioned a white paper with The Brattle Group, an economic and financial consultancy, and To the Point, a marketing and systems consultancy.

IEE Study

In the study, “The Costs and Benefits of Smart Meters for Residential Customers,” we found that utilities and their customers can expect positive net benefits from their AMI investments during the next 20 years. Although specific results will vary by utility, the study found that even with conservative assumptions about how engaged customers will become with energy management technologies, utility programs and rate plans, AMI benefits will outweigh the costs.

In particular, the analysis showed that the utility strategy with the potential to achieve the greatest consumer-driven benefit is to focus on accelerating EV adoption. EV benefits created a disproportionately high share of the overall consumer-driven savings, indicating that even modest increases in EV adoption will have a large impact on benefits.

Study Framework

For the study, we created a framework to compare AMI benefits and costs in relationship to types of utilities and customers. We began by identifying three categories of benefits produced by AMI: those for utilities, customers and society.

  • Utility benefits include enabling utilities to deliver more reliable service with better outage detection and recovery, along with automated meter reading to their entire customer bases.
  • The benefits of quicker outage detection and recovery, as well as the possibility to avoid outages, extend to customers. In addition, customer benefits include the energy savings they can achieve by participating in their utilities’ energy management or demand response programs. By reducing or shifting their energy use, customers can save money and help their utilities defer the need for additional peak generation, which can help mitigate future rate increases.
  • These energy management benefits extend to society through lower energy prices in spot markets and potentially lower impact on the environment.

Differentiating Utilities

The framework identified four prototypical utilities. These distinctions were based on real-world factors that influence the overall business case for smart meters, including current generation mix, renewable energy portfolio, regulatory environment, energy prices and emphasis on efficiency and conservation.

In addition, for all example utilities, we assumed:

  • A service area with 1 million customers.
  • AMI is phased in gradually during a five-year period.
  • All customers have access to a Web portal or the option of a simple, in-home display for feedback on their electricity usage.
  • All customers are defaulted to a rate offering a peak-time rebate that rewards customers for reducing their consumption during 12-15 event days per year. In addition, some share of customers opt in to heat wave (i.e., critical-peak) pricing or time-of-use rates for households with EVs.
  • The utilities can verify and measure their customers’ participation in a direct load control program.
  • A small percentage of customers have EVs with a time-of-use rate plan applied on a daily basis for the entire household.
  • Customers may select an automated home energy management technology, such as a programmable communicating thermostat or a home energy management system that gives them the ability to monitor and control electrical devices and appliances within their homes.

Segmenting Utility Customers

Regarding utility customers, we factored in how likely they were to be engaged in their utilities’ programs and how actively they would manage their energy use. The model assumes that customers will become involved with their utilities in a way that resonates with their energy worldview, ranging from those who do not wish to be engaged at all, to those who are motivated by economic or environmental concerns and are willing to be more engaged.

In considering how customers will manage their energy use, we anticipated that even within one of the market segments mentioned, customers will manage their energy usage in ways from passive behaviors to active energy management to investing in more elaborate automation. We also assumed that customers will choose different technologies, utility programs and rates depending on their style of energy management.

Considering Costs

We relied on AMI business cases and equipment manufacturers’ prices, as well as projections and other sources when considering costs. We based the cost of devices on actual prices and projections provided by manufacturers and assumed that during the next 20 years, prices will decline as innovations occur, economies of scale take hold and manufacturing costs decline. Technology innovations not known today likely will appear in the market.

We further assumed that customers will choose their own preferred technologies, so we used an average cost for each type of device. The study accounted for the device cost independent of whether it is paid for by consumers, utilities or a subsidy.

Study Results

Our results showed that the range of total costs for our prototype utilities to invest in AMI and associated home energy management technologies will vary from $198 million to $272 million (in a hypothetical service area with 1 million customers). The IEE study found that the AMI investment will produce operational savings (resulting from avoided metering costs, automated outage detection and remote connections) of between $77 million and $208 million, and customer-driven savings (resulting from energy pricing programs, in-home enabling technologies and energy information) of between $100 million and $150 million. The net benefits (i.e., operational savings plus customer-driven savings less total costs) from investing in AMI ranged from $21 million to $64 million for the four types of utilities.

In estimating the net benefits of AMI, we took a conservative approach and assumed fairly low participation rates by customers in program offerings even after 20 years. We project that if customers can choose their preferred rate plans, programs and enabling technologies and if significant investment is made to engage consumers, the benefits to customers, utilities and society would be greater.

Our analysis also revealed the strategy with the potential to return the greatest financial benefit to utilities and customers: focusing on accelerating EV adoption. Households that have EVs—which at its maximum represented only 1.5 percent (15,000) of the hypothetical 1 million customers in a service territory—created a disproportionately high share of the overall consumer-driven savings, indicating that even modest increases in EV adoption will have a large impact on benefits (primarily driven by avoided gasoline costs).

Our study did not address some key issues. In some regions, utility customers are choosing not to have a smart meter installed. This opting out of smart meters results in a loss of operational savings that could have been realized with full deployment. Such losses in savings are borne by all customers in a utility service area. In addition, it is unclear how allowing small numbers of customers to opt out of the basic building block of the smart grid will affect the nation’s ability to transition to a modernized grid.

Also, given the very low penetration of distributed resources at this time, the study did not integrate or quantify the incremental value (costs and benefits) and environmental benefits of integration of distributed renewable generation.

We hope the IEE white paper will provide a framework general enough to be adapted by individual utilities and regulators conducting their own analyses. The study presented the same data in multiple ways to make the concepts behind the analysis more accessible to a wide range of stakeholders.

The study does not claim that AMI and customer programs measured in the paper would be cost-effective for every utility. Results will vary using different assumptions. Findings from the study, however, give us great confidence that AMI benefits will exceed their costs under realistic assumptions.

IEE white paper: http://edisonfoundation.net/iee


Lisa Wood is executive director of the Institute for Electric Efficiency, http:// edisonfoundation.net/iee.

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